IBKR Toolbox – Using Risk Navigator to Calculate the Forward Price of an Option

Interactive Brokers’ Trader Workstation (TWS) Risk Navigator stands as one of the most sophisticated risk analysis tools available to retail traders, offering institutional-grade capabilities for modeling potential outcomes across complex options positions. Among its most powerful features is the custom scenario functionality, which allows traders to project option prices based on changes in underlying price, implied volatility, and time decay.

While many traders rely on basic option calculators, the Risk Navigator offers a comprehensive analysis environment that simultaneously evaluates multiple positions against customized market scenarios. This multidimensional approach provides a more nuanced understanding of how options and combinations will behave under various market conditions, helping traders make more informed decisions about position management and strategy selection.

The tool’s strength lies in its ability to model complex interactions between multiple variables—underlying price movements, volatility changes, and time decay—which collectively determine option pricing. By manipulating these variables through custom scenarios, traders can stress-test strategies before execution and develop contingency plans for various market developments.

Accessing the Risk Navigator What-If Feature

The process begins with creating a watchlist containing the options or combinations you wish to analyze. To initiate a custom scenario analysis:

1. Right-click on an option within your watchlist
2. Scroll down and select “Display What-if”

• The Risk Navigator will open with a red border, indicating it’s in edit mode

The investor could also open a new “What-if” from the New Window area and type in the option or options once it is up.

This initial view displays the current market pricing and associated risk metrics for your selected option. To enhance your analysis, additional risk columns should be added through the Metrics Menu. Essential metrics include:

• Delta: Measuring price sensitivity to underlying movement
• Delta Dollars: Translating delta into actual dollar exposure
• Gamma: Representing the rate of change in delta
• Vega: Quantifying sensitivity to volatility changes
• Theta: Measuring time decay exposure

With these metrics displayed, you can now see both current market prices and associated risk values, establishing a baseline for your scenario analysis.

The investor can access the custom scenario feature by clicking on the “View” menu at the top of the Risk Navigator, scrolling down to and selecting “Custom Scenario”. The Custome Scenario feature splits the screen, displaying the current market scenario on the left and a customizable scenario on the right.

The custom scenario initially replicates the market scenario but can be modified to model different conditions.

The scenario editor allows the investor to adjust three critical variables:

• Underlying price movements
• Option implied volatility
• Date (including dates beyond expiration)

Additionally, you can set a final settlement price to model expiration outcomes. Each adjustment appears in red text until you click “Apply,” at which point the custom scenario recalculates all option values and risk metrics based on your parameters.

Practical Scenario Examples

Scenario One: Single Option Analysis: Long Call

Consider a long call position where you want to model two separate scenarios:

1. The underlying price increases by $15
2. Implied volatility decreases by 15%

For the first scenario, select “chg” from the “Type” dropdown and enter “$15” in the price field. After applying this change, the option’s premium increases substantially, reflecting the call’s positive delta exposure. The risk metrics also adjust, showing higher delta and delta dollars but reduced gamma as the option moves further in-the-money.

For the second scenario, reset the price change and enter “-15%” in the volatility field. Upon application, the option’s premium decreases, demonstrating the how volatility contractions can undermine long option positions.

Scenario Two: Complex Strategy Analysis: Strangle Combination

When analyzing multi-leg strategies like strangles, the Risk Navigator’s power becomes even more apparent. A strangle— consisting of a call and put with different strikes in the same expiration—responds asymmetrically to price changes but symmetrically to volatility changes.

Modeling a 30% price increase reveals how the call’s premium rises substantially while the put’s premium falls, though not proportionally. The net position delta shifts dramatically positively, as visualized in both the data table and the position graph, where the custom scenario (dotted blue line) diverges significantly from the current market scenario (white line).

Alternatively, modeling a 50% volatility decrease shows both options losing significant value, highlighting the strangle’s strong positive Vega exposure. This scenario helps traders understand why strangles typically perform poorly when markets calm after periods of heightened volatility.

Perhaps the Risk Navigator’s most valuable feature is its ability to model positions across time, including beyond expiration. By advancing the date to the day before expiration, traders can visualize the accelerating theta decay that characterizes options in their final days. Out-of-the-money options show particularly dramatic premium erosion, reinforcing the challenges of holding such positions into expiration week.

The tool also allows modeling what happens after expiration by:

1. Setting a date beyond expiration
2. Specifying a final settlement price
3. Adjusting the current underlying price

For example, modeling a strangle where the underlying price exceeds the call strike at expiration automatically converts the position to 100 shares of stock in the custom scenario, with no remaining option positions. This powerful feature helps traders understand assignment risk and plan for post-expiration portfolio adjustments.

The TWS Risk Navigator’s custom scenario feature represents a significant advancement in options analysis tools available to individual traders. By providing a comprehensive environment to model the complex interactions between price movements, volatility changes, and time decay, it empowers traders to develop more nuanced strategies and manage risk more effectively.

While the learning curve may be steeper than basic options calculators, the insights gained through custom scenario analysis can dramatically improve trading outcomes. Traders seeking to elevate their options strategies should invest time in mastering this powerful tool, using it to test assumptions, validate strategies, and develop a deeper understanding of an option’s behavior across varying market conditions.

As options trading continues to grow in popularity, tools like the Risk Navigator that provide institutional-grade analysis capabilities will increasingly separate successful traders from those relying on more simplistic approaches to options strategy development and risk management.

For more information on the IBKR Risk Navigator tool, please see the Traders’ Academy course.